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Tax Tips

IRS Will Enforce Health Coverage Reporting on 2017 Returns

On Friday, the IRS updated the page on health care reporting requirements to taxpayers and tax practitioners.  the IRS will not accept electronically file 2017 individual returns unless the taxpayer indicates that they and everyone on their return had health care coverage, qualified for an exemption from coverage, or will make a shared-responsibility payment. The IRS also said any returns filed on paper that do not address the health coverage requirements may be suspended until the Service receives additional information and any refunds will be delayed

The 2017 filing season in 2018 will be the first time the IRS has enforced this requirement and will not accept tax returns that omit the information.  Last filing season, because of President Donald Trump’s executive order directing the government to limit burdens imposed by the Health Care Law caused the IRS to not enforce the health care requirement.

In 2018, the IRS determined that enforcing the rule when taxpayers file will make return filing easier on taxpayers and reduce refund delays.

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Tax Savings Moves For The Rest of 2017

The best year-end tax planning strategy for many taxpayers will be to follow the time-honored approach of deferring income and accelerating deductions to minimize 2017 taxes.  This approach may turn out to be even more valuable if Congress succeeds in enacting tax reform that reduces tax rates beginning next year in exchange for slimmed-down deductions.  Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phase-outs of various tax breaks that apply for 2017.  As always, tax planning does not occur in a vacuum. It must take into account each taxpayer’s particular situation and planning goals with the aim of minimizing taxes to the greatest extent possible.

Valuable year-end planning moves for your business includes expensing assets by taking advantage of Code Section 179 and the 50% first year bonus depreciation. You should take advantage of stock losses to offset any gains on sales in your portfolio.  You should take year-end plans to minimize the 3.8% surtax on net investment income.  If your income is lower, you should consider converting some of your traditional IRA funds to a ROTH IRA. If you have a required minimum distribution, consider making a direct contribution to the charity of your choice to avoid the income.  Disposing of passive activities may free-up suspended losses and offset other income.

There are several ways we can help with year-end planning and it is best to take advantage of it now rather than wait until after year-end when it may be too late.

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Tax Reform Framework

The Republicans have unveiled their tax reform framework. They announced that their goals were to cut taxes, simplify the Internal Revenue Code, and provide a more competitive environment for businesses.  The framework generally mirrors the proposals made by President Trump in April. Under the new bill, the top individual tax rate would be 35% and the corporate rate would be 20%.

While the framework provides tax reform targets, it does not provide legislative language which still needs to be developed.  The Republicans want to have new tax legislation before the end of the year.

For Individuals:

There will be three tax brackets: 12%, 25% and 35% and the framework allows Congress to add a fourth bracket for high-income individuals.

Repeal of the Alternative Minimum Tax: One of the largest “add backs” in high taxed states to the AMT is state income taxes.  This is also due to be repealed so this might “pull” those individuals out of AMT.

Repeal of the estate and generation-skipping tax

Taxing pass-through income at a maximum rate of 25%. The wording develops rules to ensure that high-income individuals do not use this provision to avoid the 35% bracket.

Consolidating the Standard Deduction and personal exemptions into a larger standard deduction of $12,000 for individuals and $24,000 for married couples

Increasing the child tax credit and providing a $500 credit for the care of non-child dependents.

Eliminating most itemized deductions, including the deduction for state income tax and local taxes, while preserving the deductibility of mortgage interest and charitable contributions.

For Businesses:

An end to the taxation of U.S. companies ‘ worldwide income and move to a territorial system.

A one-time tax on accumulated offshore earnings, which would be taxes at two unspecified rates. One rate for cash and a lower rate for other assets.

Limiting the deductibility of interest

For five year (or more), allowing 100% expensing of the cost of depreciable assets for buildings

The framework still needs to be moved to legislation and a Bill introduced.  Stay tuned for any updates!

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How To Avoid Tax Traps with Inherited IRAs

An  inherited Individual Retirement Account (IRA) can be a tremendous boon to the beneficiary.  Who can’t use extra money in retirement!  Most inherited IRAs are cashed out within six months of the death of the family member.  If you do cash it out, there is no way for planning tax strategies! Without proper planning, federal and state taxes can take a sizable bite from the proceeds!

Options for Inherited IRAs:

  •  Take a lump sum distribution of the entire balance
  •   Roll the inherited IRA over into a new account and take the distributions over the longer of the life expectancy of the beneficiary or the decedent.

If the account owner died before reaching the date for RMDs (Required Minimum Distributions), the beneficiary has a third option of withdrawing all the funds by the end of the year containing the fifth anniversary of the decedent’s death (The Five Year Rule). In this case, the life expectancy of the beneficiary must be used.

Keep the Beneficiary Designation Up To Date!

Marriage, divorce and the birth of children can change estate plans.  The IRA will pass by beneficiary designation and not the Will.  Please make sure you keep the beneficiary as you want it.

Titling An Inherited IRA:

An inherited IRA must be titled with both the name of the decedent and the beneficiary plus the word “inherited”. For example, one might title an inherited IRA as “Jane Doe, deceased September 30, 2017, F/B/O Jimmy Doe, beneficiary”.  If you just change the name on the IRA, that is a “cash out” so DO NOT just retitle the inherited IRA to the beneficiary. Retitling the account is best done at the brokerage where the decedent held the IRA before the beneficiary rolls it over to his or her own brokerage.

If Decedent Had Turned 70 1/2 Years of Age and Started RMDs:

If the decedent had already turned age 70 1/2 and started taking required minimum distributions, the beneficiary MUST take the required minimum distribution before the end of that year or there is a 50% penalty and you still must take the distribution.

ROTH?

Consider the beneficiary’s age and if there are already ample retirement sources, converting the inherited IRA to a ROTH may be the way to go.

Please call our office BEFORE just cashing out the inherited IRA!

 

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Charitable Giving of your IRA Required Minimum Distribution

If you are age 70 1/2 or more and are required to take an “RMD” (Required Minimum Distribution) from your IRA, are you taking advantage of the option of donating that distribution to your favorite charity? Many of us make charitable contributions during the year.  If you have an IRA and are required to take a distribution because of your age, you can use a QCD (Qualified Charitable Distribution) and eliminate that income.  This QCD option applies only to IRA and not any company plans.  It also applies to inactive SEP and SIMPLE plans.

With a QCD, your Required Minimum distribution can go directly from your IRA to the charity.  This direct transfer takes care of the RMD but it is not included in your taxable income for that year.  There is no charitable deduction since you did not include it the income from the distribution.  Excluding these amounts from income can reduce adjusted gross income (AGI) as well as taxable social security and any itemized deductions that may be limited by that AGI

This QCD option became a permanent part of the Tax Law in 2015. There can be no benefit back to you because of the giving.  If you receive tickets or some small token of appreciation, it could disallow your benefit of the direct transfer so be careful when using this option.  If you have questions or want to learn more on this topic, please call our office.

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